In May 2023, the Department for Business and Trade issued a call for evidence to gather views on the UK’s framework for non-financial reporting. A previous By All Accounts article, Non-financial reporting: what needs to be done, outlined the key recommendations made in ICAEW’s response to the review.

Part of the call for evidence centred around reporting thresholds, both company size and company type. As highlighted in our response, the number of categories a company can fall into has increased steadily over time and it has become a complicated aspect of the non-financial reporting framework to navigate. While acknowledging that it will take time to simplify scoping requirements that are relevant to some elements of reporting, such as the directors’ report and strategic report, we expressed the belief that a ‘quick win’ for government would be to review and update the company size thresholds in the Companies Act 2006 (the CA 2006). 

That ‘quick win’ is now coming to fruition, with the UK government’s announcement of plans to lay legislation before Parliament this summer to increase by 50% the monetary thresholds that determine company size, with an intended effective date of accounting periods beginning on or after 1 October 2024. This article considers some of the implications of that announcement. 

Other elements, such as the removal of duplicative reporting requirements and the audit threshold exemption, were also covered in the announcement but are not considered further here. 

Existing and new company size thresholds

The CA 2006 sets out four size regimes which drive the specific content requirements of the accounts that need to be prepared and filed with Companies House. Both qualitative and quantitative criteria determine when a company is entitled to report under a particular regime, with the quantitative criteria often referred to as ‘company size thresholds’. The four sizes of company to consider are: 

• micro-entity;
• small;
• medium-sized; and 
• large.

The existing and planned new quantitative criteria are set out in the diagram below. Companies must meet at least two of the three criteria in either their first ever financial year or for two consecutive financial years to be able to qualify for each regime.

As well as the quantitative criteria, qualitative factors are used to establish whether a company is excluded from a regime because of its nature or because it is a member of an ineligible group. For example, public companies and certain financial services companies are not entitled to apply the micro-entities, small or medium-sized regimes, regardless of meeting the relevant quantitative criteria. Detailed guidance on the criteria for each size regime can be found in the Corporate Reporting Faculty’s factsheet Entitlement to the micro, small, medium and large companies regimes.

The current company size thresholds were brought in by the EU Accounting Directive and have not been reviewed since. An update to keep pace with inflation has been overdue, and the UK’s departure from the European Union brought the opportunity for a broader review. With the European Commission’s decision to raise equivalent thresholds in the Accounting Directive by an inflationary adjustment of 25% (effective from 1 January 2024), there has been a strong case for the UK to consider similar measures in order to remain an attractive place to do business. The government’s intended uplift of 50% goes considerably beyond an inflationary adjustment and aims to build in a degree of future proofing; this is regarded as important if the UK is to maintain its position as a global leader in corporate reporting, with a highly regarded, integrated and proportionate reporting regime. 

Proportionate reporting requirements

Proportionality is a key feature of the UK’s reporting framework, with a number of special provisions in the CA 2006 for micro-entities, small and medium-sized companies when preparing and filing their annual accounts and reports. The uplift in thresholds will potentially enable companies to move down a size category and take advantage of the accompanying reduction in requirements.

The government’s impact assessment of the changes estimates that 5,000 large companies could be reclassified as medium-sized; 13,000 medium-sized companies could be reclassified as small; and 113,000 small companies could be reclassified as micro-entities.

Medium-size companies

Medium-sized companies may prepare a slightly reduced version of the profit and loss account and omit disclosures with respect to compliance with accounting standards and related party transactions. Additionally, medium-sized companies do not need to include a s172(1) statement within their strategic report or comply with the streamlined energy and carbon reporting regulations. 

Small and micro-entities

Further simplifications are available to small and micro-entities. Small companies, including micro-entities, are not required to prepare a statement of cash flows and accompanying notes. They are also not required to prepare a strategic report. A parent company entitled to use the small companies regime is generally exempt from the requirement to prepare group accounts. 

The disclosure requirements are less onerous too. Companies entitled to, and choosing to apply, the small companies regime are within the scope of Section 1A of FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland which sets out the minimum disclosures required. Accounts prepared in accordance with Section 1A must provide a true and fair view however, which may necessitate additional disclosures beyond the minimum set out in the standard.

Companies that qualify as micro-entities may choose to apply FRS 105 The Financial Reporting Standard applicable under the Micro-entities Regime. FRS 105 contains simplified recognition and measure requirements, as well as reduced disclosures compared to the full version of FRS 102 and Section 1A of FRS 102. For example, no deferred tax or equity-settled share-based payment amounts are recognised and accounting choices in FRS 102 are removed. FRS 105 requires very limited disclosures and, provided these and other basic legal requirements are complied with, the accounts are presumed by law to give a true and fair view.

Filing requirements for small and micro-entities also differ, with both sizes of company currently having the option to not file a profit and loss account and to not prepare or file a directors’ report. 

Weighing up the options

At first glance, any reduction in reporting requirements – and the associated cost saving - is likely to be seen as an immediate benefit of an uplift in the size thresholds, and something most companies would be expected to take advantage of. However, as is so often the case, the decision might not be as clear cut as it seems.

Growth trajectory

For companies on an upwards growth trajectory, any step down in the regime they qualify for may be temporary. Where companies already have processes in place to meet certain reporting requirements, it might prove disruptive to change reporting processes, only to have to reinstate them again in a few years’ time.

Concerns with FRS 105

Concerns about the micro-entities regime are widespread in the accountancy profession. Many believe micro-entity accounts contain so little information that they are meaningless for assessing the past performance, position or future prospects of a company. Credit reference agencies have long been concerned that accounts prepared under FRS 105 do not provide adequate information for them to make an informed decision as to whether to recommend a company for credit, thereby reducing a company’s ability to access finance. 

Conceptually, the ‘deemed true & fair’ nature of FRS 105 accounts is considered flawed, with some accountancy firms not willing to use the micro-entities regime. Such are the concerns around FRS 105, ICAEW concluded in its response to DBT that, while other size thresholds should be increased, micro-entity thresholds should be maintained at their current level.

Interaction with other changes

Other moving parts in the corporate reporting landscape also need to be borne in mind. The Economic Crime and Corporate Transparency Act will see filing requirements change for small and micro-entities in the next year or two, with companies falling within either size regimes required to file their profit and loss accounts.

The final amendments to FRS 102 from the second periodic review of the standard by the Financial Reporting Council have been published. Among the changes is an increase in the minimum disclosure requirements in Section 1A. The effective date of this and most other amendments is 1 January 2026.

Tip of the iceberg

Increasing the size thresholds will certainly help keep the UK framework competitive. However, other underlying issues will remain. The definitions of turnover, total assets and employees would all benefit from a review. The definition of ‘employees’ for example should capture the entire workforce, not just the employees of the company. The definition of turnover is problematic for categorizing companies in certain sectors, such as banking and insurance. The term ‘balance sheet total’ is often misinterpreted in practice. 

There are bigger questions too. Is it enough to have to meet just two of three size criteria? Some economically significant companies can qualify for the micro-entities regime by virtue of having very few employees. Should more emphasis be placed on the ownership structure of the company? The preparation of less detailed accounts by owner-managed businesses for example may be warranted given the owners’ awareness of the company’s financial performance and position from their day-to-day involvement. Should external shareholders have a say on the regime applied?

In summary…

With 2024 set to be a General Election year, limited parliamentary time exists to effect change to the legislative framework for UK reporting. Nevertheless, we believe the government should do as much as it can in the time available to underpin the UK’s position as a global leader in quality corporate reporting. Increasing company size thresholds is an important first step towards a modernised model for UK corporate reporting.

Sally Baker, Head of Corporate Reporting Strategy, ICAEW